How do credit checks affect credit score?

Credit checks are carried out by lenders when you make an application for credit. They are a necessary part of the process that will allow lenders to see your credit history and compare that to their own lending criteria. This is done whether you are looking at different types of personal loans or a loan for your business. Credit checks are used by lenders to establish a number of different things about a potential borrower, including:

Your identity
How much debt you already have and what type (e.g. guarantor loans or other types of secured loans)
Whether you have missed credit payments in the past
How often you move home
Whether you have a history of making late payments
The combination of all the information that lenders have access to will give them an idea of what kind of risk they are taking on a potential borrower. Lenders have their own individual criteria when it comes to making assessments about borrowers. However, factors such as missed payments on other credit accounts, or moving home frequently, could have an impact on whether someone is considered a good credit risk, whoever the lender is.

Two types of credit checks

When a credit check is carried out it could be one of two types: a hard search or a soft search.

A soft search – this type of search means that the searcher doesn’t see all the information in your credit report. Soft searches are often used to establish identity or as a preliminary search in the process of an application.

A hard search – hard searches are much more thorough and mean that the searcher will be able to see a far more comprehensive picture of your credit history. This type of search normally takes place when you’re opening a new account or making an application for a new personal loan or credit card.

How do these credit checks affect your credit score?

You can have an unlimited number of soft searches against your credit report and this won’t have any impact on your credit score. Soft searches do appear on your report but they won’t influence a potential lender who is looking at your credit history and making a decision about whether or not to lend to you.

Hard credit checks are a different story. Each hard check that is carried out against your credit history will show up to any other lenders or organisations who then later carry out another credit search against your report. They can stay on your credit history for between 12 months and 2 years.

It’s not generally a problem to have a hard search against your credit report when you make an application for a new personal loan or credit card. The problem arises if you are making multiple searches in a short period of time. A single hard search will be removed from your credit history (in most cases) within 12 months so the impact is short term or non-existent. However, if you have a lot of hard searches in a short space of time it looks to lenders like you are desperate for credit and so probably struggling financially. It’s this that tends to have the negative impact on an individual credit score.

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